Amid Downbeat Headlines, Canadian Factories Persevere

Some say Canadian factories are in the dumps. Manufacturing data for October suggests otherwise.

A string of high-profile factory closings in Canada – most recently last week’s announcement that Kellogg Co. was shuttering its plant in London, Ontario — has dominated headlines and had analysts wondering whether policymakers were overlooking the real risk story in the Canadian economy.

But October manufacturing data released Tuesday indicates Canadian factories are slowly but surely benefiting from increased production in the U.S. and Mexico, and managers might be adding to stockpiles with knowledge of stronger demand around the corner.

Factory sales rose 1.0% to 50.09 billion Canadian dollars ($47.31 billion), well above market expectations for a decline in October of 0.3%, according to economists Royal Bank of Canada. Excluding the auto sector, manufacturing sales advanced by a heftier 1.3%. In volume terms, sales also advanced 1.0% in the month.

With the October gain, factory sales are at their highest level in 17 months. The year-over-year gain, although a meager 2.6%, still represents the biggest 12-month advance since July 2012. Five of the last six months of data, to Oct. 31, indicate monthly gains. And a key forward-looking indicator, the level of new orders, rose by a hefty 5.9% to C$50.58 billion, or the biggest monthly gain since last November, while unfilled orders rose 0.7%.

Jimmy Jean, economic strategist at Desjardins Capital Markets, cautions that the October report does have flaws. The shipment of durable goods — which includes household appliances, vehicles, and machinery and equipment, and are often sold abroad — declined 0.5% in the month. Further, the October gain was driven in large part by the biggest climb in food-industry sales in two decades.

Still, the report indicates the Canadian economy had a strong performance in October, Mr. Jean said, and concerns about further weakness, as relayed by Bank of Canada Governor Stephen Poloz, might be misplaced.

Bill Adams, senior international economist for PNC Financial Services Group in Pittsburgh, Pa., said Canadian producers are well “embedded” in the North American supply chain, and that means they stand to benefit from improved confidence among operators of U.S. and Mexican factories. Further, data on Monday indicated U.S. industrial output in November surpassed its prerecession peak.

“Canada will be along for the ride, and that’s a good thing,” he said, adding the 1.9% rise in inventories is another signal Canadian firms anticipate stronger demand in the coming months.

About Canada Real Time

Canada Real Time provides insight and analysis into what’s making news in Canada, a country punching above its weight on the world stage thanks to its vast resources and strong banking sector. Drawing on the expertise of The Wall Street Journal and Dow Jones Newswires, we take a look at developments in fields ranging from business to politics to culture. You can contact the editors at canadaeditors@dowjones.com